Romania Unexpectedly Speeds Up Rate Cuts to Record-Low 4.5%

Irina Savu

August 5, 2013 — 10:12 AM EDTAugust 5, 2013 — 10:12 AM EDT

Romania cut its main interest rate more than economists forecast and central bank Governor Mugur Isarescu indicated further easing, a sign policy makers are growing more confident of meeting their inflation target.

The Banca Nationala a Romaniei cut its benchmark rate today by half a point to a record-low 4.5 percent from 5 percent, according to an e-mailed statement from the Bucharest-based regulator. Thirteen of 14 economists in a Bloomberg survey predicted a reduction to 4.75 percent, while one expected borrowing costs to stay unchanged.

Policy makers are accelerating monetary easing after cutting rates a quarter point in July as inflation is set to slow, making room for monetary stimulus. The nation is seeking to build investor confidence further after agreeing with international lenders last week on a new 4 billion-euro ($5.3 billion) precautionary loan as protection from turmoil on global financial markets.

“There’s more room to reduce rates,” Isarescu told reporters in Bucharest today. “We mostly focused on the general inflation trend. The inflation rate will post a significant downward move in the next two month because of the base effect.”

The central bank also has “reasons to proceed with” reducing reserve ratios in a “gradual” way to avoid an “unpleasant moment,” Isarescu says.

Leu Rally

The Romanian leu has strengthened 0.9 percent against the euro this year, the third-best performance among 24 emerging-market currencies tracked by Bloomberg after the Chinese yuan and the Mexican peso. It traded 0.3 percent stronger at 4.4110 per euro as of 5:01 p.m. in Bucharest.

Romanian policy makers, who restarted easing last month after a pause of more than a year, are accelerating rate cuts just as other countries in the region are nearing the end of their cycles.

Poland’s central bank ended its monetary easing last month, Governor Marek Belka said after the Narodowy Bank Polski trimmed its benchmark rate to a record 2.5 percent on July 3. Hungary’s policy makers indicated they would slow the pace of reductions to fine-tune policy after quarter-point cuts in each of the past 12 months, bringing their benchmark to an all-time low of 4 percent on July 23.

‘Bold Move’

“This is a bold move by the” Romanian “central bank in an environment in which other regional central banks have opted to keep rates unchanged -- Poland -- or to possibly reduce the pace of easing -- Hungary,” Abbas Ameli-Renani, an economist at Royal Bank of Scotland Group in London, said in an e-mail.

Inflation accelerated to 5.4 percent in June from 5.3 percent in May. Price growth will probably slow more quickly than earlier expected because of “the strong downward pressure” stemming from the reduction of the value-added tax for some food items including bread to 9 percent from 24 percent from September, Ameli-Renani said.

The central bank’s quarterly inflation report, to be released Aug. 7, “foresees faster disinflation in the period ahead, along with a pick-up in economic growth,” Isarescu said.

The consumer-price index may have been less than 4.5 percent last month as changes in inflation are bigger than the central bank’s previous forecast, Isarescu said.

Further Cuts

The rate decision “reflects several factors, including a growing conviction that inflation will fall back by the end of this year and the insurance offered by a new precautionary stand-by arrangement with the IMF,” Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London, said by e-mail. “Further cuts may now be likely and are nudging down our end-year forecast for rates to 4 percent.”

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The IMF and the European Union said on July 31 that they reached a staff-level agreement with Romania on the precautionary facility, the country’s third loan accord in five years. The fund predicts the economy will grow about 2 percent this year and 2.25 percent in 2014, spurred by rising exports and recovering domestic demand next year, according to Andrea Schaechter, the lender’s mission chief to the country.

Economic growth may exceed 2 percent this year, according to the central bank’s projection, Isarescu said.

Romania stopped an easing cycle with a rate cut in March 2012 after a drought stoked food prices and utility bills rose following a pledge to the IMF to free energy prices.

Gross domestic product advanced 2.2 percent from a year earlier in the first quarter, accelerating from a 1.1 percent pace in the previous three months. The economy will grow 1.9 percent this year, exceeding the previous forecast of 1.6 percent because of a pickup in export demand, Budget Minister Liviu Voinea said on July 29.